Introduction
When an individual sells a residential house to purchase another residential house, then to avoid hardship by levy of income tax on the sale of the old house, the government has given relief u/s 54.
Following are the Basic Conditions of Section 54:
The benefit of section 54 is available only to an individual or HUF.
The asset transferred should be a long-term capital asset, being a residential house property.
Within one year before or two years after the date of transfer of the old house, the taxpayer should acquire another residential house or should construct a residential house within three years from the date of transfer of the old house. In case of compulsory acquisition, the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional).
Key Points to Remember for Section 54:
The exemption can be claimed only in respect of one residential house property. From A.Y. 2021-22, the benefit of exemption in respect of investment made in two residential house properties can be claimed only if the total Long Term Capital Gain does not exceed Rs. 2 Crore. Also, the option for exemption from two residential house properties is available only for once-in-a-lifetime.
Budget 2023 Amendment - From Assessment Year 2024-25, the maximum limit of Capital Gain Exemption u/s 54 is restricted to Rs 10 Crore.
Calculation of Exemption Amount Allowed Under Section 54
Exemption under section 54 can be claimed in respect of capital gains arising on transfer of capital asset, being long-term residential house property. Exemption under section 54 will be lower of the following :
Amount of capital gains arising on transfer of residential house; or
Amount invested in purchase/construction of new residential house property
Capital Gain Exemption Cap of Rs 10 Crore from A.Y. 2024-25
Consequences if the new house is transferred:
To ensure and avoid mis-utilisation of this benefit, a restriction is inserted in section 54. The restriction is in the form of prohibition of sale of the new house as below :
The restriction will be attracted if after claiming exemption under section 54, the new house is sold before a period of 3 years from the date of its purchase/completion of construction.
If the new house is sold before a period of 3 years, then at the time of computation of capital gain arising on transfer of the new house, the amount of capital gain claimed as exempt under section 54 will be deducted from the cost of acquisition of the new house.
Requirement to Deposit Money in Capital Gain Account Scheme:
If till the date of filing the return of income, the capital gain arising on transfer of the house is not utilised (in whole or in part) to purchase or construct another house, then the benefit of exemption can be availed by depositing the unutilised amount in Capital Gains Deposit Account Scheme in any branch of public sector bank
The new house can be purchased or constructed by withdrawing the amount from the said account within the specified time-limit of 2 years or 3 years, as the case may be.
Non-utilisation of amount deposited in Capital Gain Deposit Account Scheme
If the amount deposited in the Capital Gains Account Scheme is not utilised within the specified period for purchase/construction of the residential house, then the unutilised amount will be taxed as income by way of long- term capital gains of the year in which the specified period of 2 years/3 years expires.
Few Judgements of Courts to Understand Practical Scenarios
1. Whether Investment in New House Prior to Sale of Old House is Allowed as Exemption under Section 54 : Held as Yes in case law Ms. Moturi Lakshmi vs. The Income Tax Officer, 2020
2. If Investment is Made in a house which is made duplex by purchasing two houses on two different floors or two adjacent houses , whether exemption u/s 54 or u/s 54F is allowed? : Held Yes in multiple cases were court has stated that The Delhi High Court opined that the phrase “a residential unit” was not utilised in the section and The sole stipulation is that it be used only for household purposes and not for commercial purposes. Ref. Commissioner of Income Tax vs. Gita Duggal, 2013, Commissioner of Income Tax v. Syed Ali Adil, 2012
3. Can exemption under section 54F/ 54 be denied to an assessee in respect of investment made in construction of a residential house, on the ground that the construction was not completed within 3 years after the date on which transfer took place, on account of pendency of certain finishing work like flooring, electrical fittings, fittings of door shutter, etc?
Held as Exemption u/s 54F / u/s 54 is allowed . Reference- [2012] 19 taxmann.com 17 (Karnataka) HIGH COURT OF KARNATAKA Commissioner of Income-tax v. Sambandam Udaykumar.
The court observed that condition for claiming the benefit u/s 54F is that capital gains realized from sale of capital asset should have been invested either in purchasing a residential house or in constructing a residential house within the stipulated period. Merely because the construction was not completed in all respects and possession could not be taken within the stipulated period, would not disentitle the assessee from claiming exemption u/s 54F
4. If Old property was in Single Name but New House was in Joint name of Husband and Wife than whether Section 54 / Section 54F exemption is Available :
Exemption was allowed . Reference-[2013] 30 taxmann.com 34 (Delhi) HIGH COURT OF DELHI, Commissioner of Incometax-XII v.Kamal Wahal. Court held that merely including wife name cannot be ground to deny partial exemption especially when wife has not actually contributed to any funds in acquiring new house